Effective with applications taken on or after February 1, 2016, for all DU approved conventional loans, PennyMac is aligning with Fannie Mae’s updated self-employment income policies relating to 1065 partnerships and 1120-S corps.

Per Fannie Mae B3-3.2.2:

Business income may only be used to qualify the borrower if the lender obtains documentation verifying that

the borrower has ownership of the income (Schedule K-1 may be used to document ownership share), and

the income was actually distributed to the borrower.

Alternatively, the lender can obtain documentation verifying that

the borrower has access to the income through a corporate resolution or other documentation that the lender determines is appropriate—unless the borrower(s) own 100% of the business, in which case confirmation of access to the income is not required; and

the business has adequate liquidity to support the withdrawal of earnings.

Business income* should be calculated based on the number of years of tax returns required by DU:

If DU requires one year of tax returns, the lesser of business income or distributions should be used for qualifying income.

If DU requires two years, and the business income is decreasing, then the qualifying income should be the lesser of the current year business income or current year distributions.

If DU requires two years, and the business income is the same or increasing, then

A) Calculate the business income based on the most recent 24 months,

B) Average the distributions over the same 24 months,

If the current year distributions are $0, the borrower will need to demonstrate access to the income and business liquidity.

The qualifying income should be the lesser of A or B.

*Business income includes all adjustments that would normally be required to calculate self-employed income. Distributions are the amount of money the borrower actually received from the business, as documented on the K-1.

Examples: Green indicates amount that should be used to qualify. All examples assume two years tax returns are required.

2013

2014

Income Used to Qualify

Income

$20,000

$15,000

$15,000/12 = $1,250

Distribution

$10,000

$5,000

$5,000/12 = $416

Income

$20,000

$15,000

$15,000/12 = $1250

Distribution

$5,000

$10,000

$10,000/12 = $833

Income

$15,000

$20,000

$35,000/24 = $1,458

Distribution

$10,000

$5,000

$15,000/24 = $625

Income

$15,000

$20,000

$35,000/24 = $1,458

Distribution

$17,000

$23,000

$40,000/24 = $1,666

Income

$15,000

$20,000

$35,000/24 = $1,458

Distribution

0

0

$0/24 = $0

Income

$15,000

$20,000

$35,000/24 = $1,458

Distribution

0

$10,000

$10,000/24 = $416

Income

$15,000

$20,000

$35,000/24 = $1,458

Distribution

$25,000

0

$0/24 = $0

If distributions are insufficient to support the business income, the following alternative approach may be used:

The business income may be used to qualify if both “1” and “2” are met:

1. Document the borrower’s access to the business funds via:

100% ownership,

A partnership agreement indicating access,

A corporate resolution indicating access, or

Other documentation determined to be appropriate.

2. The business has adequate liquidity to support the withdrawal.

Liquidity is defined as documented liquid business assets less business liabilities.